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Where’s my piece of the pie?

One of the most pernicious ideas promulgated by economics textbooks is that the economy is a zero-sum game. That is, that if I win in the free market, then someone else must have lost. But that is not how the free market works.

Here is how it is often described in most textbooks:

Society faces an important tradeoff: efficiency vs. equality

Efficiency: when society gets the most from its scarce resources

Equality: when prosperity is distributed uniformly among society’s members

Tradeoff: To achieve greater equality, [government] could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”

[All quotes in this post are from the premium PowerPoint of Greg Mankiw’s Principle of Economics teacher resource material.]

Again, we have the mention of society, not individuals. Society does not face any tradeoffs, individuals do. And the free market is not about efficiency, although that is a side benefit, it is about liberty. But, worse than that is the concept of “the economic pie”. This is the essence of the zero-sum game – that there is only one pie, and if you have a bigger piece, it is because you stole some from me.

According to this way of thinking, when this happens, the government must step in.

If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided.

This, it is claimed, is because

the market fails to allocate society’s resources efficiently

Again we have society, which doesn’t own resources, and again we have efficiency. The two most frequently cited market failures are externalities and monopolies, both of which will be discussed in a later post.

The problem with zero-sum thinking is that it gives rise first to envy, and then to hatred. We have seen it in the Occupy Wall Street (OWS) protests and the so-called anarchists on May Day of this year (I say so-called because real anarchists would not call for more government redistribution of wealth). You can scan through the comments sections of many far left web sites and find the most vile comments about the “rich”. People who are considered rich have been vilified and their lives have been threatened. Private property has been destroyed and businesses shut down, ironically throwing some of the “99%” out of work. Throughout history the idea has been used to justify violence against people perceived to be “the haves”, such as the Reign of Terror in France and the communist atrocities of Stalin, Mao, and Pol Pot.

Zero-sum thinking is not how the free market works, its how the government works. It is wrongheaded but is taught in the textbooks of our high schools and colleges every day.